Asset Account for Mineral and Energy Resources: Monetary Terms · SEEA-CF recommends that valuation be undertaken only for deposits in: • Class A Commercially recoverable resources

Asset Account for Mineral and Energy

Resources: Monetary Terms

DAY 02: SESSION 04

Regional Training Workshop on the System of Environmental-Economic Accounting

Ross Alexander Shanghai, China

Australian Bureau of Statistics 17 November 2015

Unit Outline

• how does SEEA define and record mineral assets?

• what are asset accounts?

• what are the differences between balance sheets and

assets accounts?

• what are the differences between economic and

environmental assets?

Asset Account for Mineral and Energy Resources: Monetary Terms

Acronyms AFR = Australian Financial Review

EDR = Economically Demonstrated Resources

GMI = Gross Mixed Income

GOS = Gross Operating Surplus

GOSMI = GOS plus GMI

LME = London Metals Exchange

NPV = Net Present Value

OCE = Office of the Chief Economist

USGS = United States Geological Survey


Acronyms SEEA = System of Environmental-Economic Accounting

SEEA-CF = SEEA Central Framework

SNA = System of National Accounts

2008 SNA = SNA Manual (2008 Edition)

UNFC-2009 = UN Framework Classification for Fossil Energy

and Mineral Reserves 2009


Asset Account for Mineral and Energy Resources

This session is based on Section 5.5.4 Monetary asset

accounts for mineral and energy resources in Chapter 05

of the System of Environmental-Economic Accounting

2012 - Central Framework (pp.153-159).


Valuation of Mineral and Energy Resources

Both the SNA and SEEA recommend asset valuation based

on market prices, but these prices are often unavailable,

especially for environmental assets. In particular, the

following conditions may apply to environmental assets:

• never sold or rarely sold

• leased instead of sold

• have long production 'lead' times

• sale price is unrepresentative of value of similar assets



The measurement boundary extends to all known

deposits in physical terms BUT:

• it may not be possible to value all of these deposits in

monetary terms owing to degrees of uncertainty

regarding expected extraction profiles and incomes

SEEA-CF recommends that valuation be undertaken only

for deposits in:

• Class A Commercially recoverable resources

(UNFC for Fossil Energy and Mineral Reserves 2009)

corresponding to

• economic demonstrated resources in McKelvey Box

Asset Account for Mineral and Energy Resources: Physical Terms

Valuation of Environmental Assets

Asset Account: Structure and Principles

In the Central Framework, consistent with the SNA, the

scope of valuation is limited to the benefits that accrue to

economic owners of economic assets (including many

environmental assets):

SOURCE: Figure 5.1 Relationship between environmental and economic assets, in UN (2014) System of

Environmental-Economic Accounting 2012 - Central Framework, p.139.


As discussed in Session 01, SNA and SEEA-CF suggest

methods to approximate market values for environmental

assets where market prices are unavailable or unsuitable:

• net present value method

• rights-based valuation

• appropriation method



Net Present Value (NPV) method

• resource rent (or RR) derived using residual value method

• discounted value of expected future economic benefits

from the asset

Rights-Based Valuation method

• on the basis of tradeable rights to own or use asset

e.g. fishing rights

Appropriation method

• sum of taxes, levies, royalties collected by government


Net Present Value Method

1. measurement of returns on environmental assets –

resource rent derived through residual value method

2. rate of return on produced assets

3. expected pattern of future benefits

4. asset life of the resource

5. choice of discount rate



The value of subsoil mineral and energy resources is

usually determined by the present value of the expected

net returns resulting from the commercial exploitation of

those resources:

• such valuations are subject to uncertainty and revision

• it may be difficult to obtain appropriate prices for

valuation purposes as ownership changes infrequently

• it may be necessary to use valuations determined by

owners of the assets in their own accounts.



Asset value derives from expected benefits rather past or

current returns:

• difficult to know future prices, extraction rates and costs

• assume past and current extraction rates and resource

rents will continue unless better information available

• using a moving average of resource rent will reduce

volatility of estimates

• 'abnormal' results require re-estimation of NPV model



Estimates of the asset life must be based on the available

physical stock and on assumed rates of extraction:

• need to consider expected growth for renewable

resources

• use of models is necessary to determine asset life for

biological resources (e.g. fish)

• no depletion is recorded where extraction is less than

the sustainable yield

NPV estimates are stable for this factor where asset lives

are over twenty years.



SOURCE: Figure 5.2 in UN (2014) System of Environmental-Economic Accounting 2012 - Central Framework, p.148.


Which mineral and energy resources should be valued in

monetary terms?

• variability in price, extraction costs and technology

mean that, over time, considerable scope for resources

to move between classifications

e.g. Classes A, B and C (UNFC-2009)

EDRs, sub-economic and inferred resources



Which mineral and energy resources should be valued in

monetary terms?

• justifies the use of a moving average in calculating NPV

asset values

• physical estimates of mineral and energy resources

should indicate which resources have a corresponding

monetary estimate



Most countries (including Australia) use the NPV method to

value mineral and energy resources:


where V = net present value

n = asset life

r = nominal discount rate

RR = resource rent

t = time period


Asset life

• EDRs (or commercially recoverable resources) at year

end divided by five-year moving average of production

Discount rate

• ABS uses large business borrowing rate published by

Australia's central bank

• BPS assumes discount rate to be 0.04 or 4% for NPV

• this rate represents the opportunity cost of the funds

which mining and oil companies invest in extraction.



A discount rate is needed to convert stream of resource

rents into an estimate of asset value:

• rate expresses asset owner’s time preference, and

their attitude to risk

• a market-based discount rate is assumed to equal the

rate of return on produced assets

This rate can be seen as the expected (or approximate)

rate of return on non-produced assets.



Resource rent (or net income per year) is the share of

GOSMI earned from the extraction of resources:

RR = (p – c) * q


where p = average price received per unit (or unit prices) at 30 June

q = average quantity extracted

c = average production cost per unit at 30 June

(including a normal return to produced capital)

Note that 'average' in Australia refers to five-year lagged or moving average.


Note the following data sources by variable for ABS data:

• average: refers to five-year lagged or moving average

• quantity: production volumes are published annually

by Geoscience Australia (AIMR | OGRA)

• unit prices: Australian Financial Review (AFR)

London Metal Exchange (LME)

Resources and Energy Statistics (OCE)

United States Geological Survey (USGS)

• production costs: are provided by a private consulting

firm using a sample set of mines and industry trends


Net Present Value Method Example valuing crude oil:

mine life = 5 years

price = $1,000 per kilolitre

cost of production = $500 per kilolitre

production = 10 megalitres per year

discount rate = 7.5%

resource rent = (p - c) * q

= (1 - 0.5) * 10,000,000

= $5 million per year

= $25 million over 5 years

1 megalitre = 1000 kilolitres


Net Present Value Method Example valuing crude oil:

NPV = Σ $25 million t=0 (1+0.075)n = 5 5 5 5 5 5 1.0751 + 1.0752 + 1.0753 + 1.0754 + 1.0755

= 4.65 + 4.32 + 4.02 + 3.75 + 3.48

= $20.2 million



GROUP ACTIVITY 03

Key Concepts

SNA and SEEA measure the same assets. SNA uses

balance sheets and SEEA uses asset accounts:

• balance sheets measure the value of stocks of assets

and liabilities at the beginning and end of the

accounting period

• all changes between the opening and closing balance

sheet are recorded in the various accumulation

accounts


Documents

Asset Account for Mineral and Energy Resources: Monetary Terms · SEEA-CF recommends that valuation be undertaken only for deposits in: • Class A Commercially recoverable resources